Netflix War on Internet Providers Shows Cost-Control Strategy

This week’s episode of the ongoing drama over who should shoulder the costs for Internet video featured on-screen messages from Netflix informing its customers that poor video performance was the fault of their Internet service provider. Verizon quickly fired back with a cease-and-desist letter. The latest spat took place days after comedian John Oliver produced a widely shared segment on his HBO show that chided Comcast, Time Warner Cable and others for violating the spirit of the open Internet.

But Mr. Oliver’s amusing and informative narrative notwithstanding, Netflix’s battle with Internet providers is not about the oft-cited regulatory principle of net neutrality, which only involves equal treatment of data on the “last mile” to the customer's home or business. Rather, it's a pragmatic business strategy having to do with margins and a key network architecture decision the company made two years ago.

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With Netflix establishing itself increasingly as a premium cable network that produces its own programming rather simply distributing older movies and TV reruns, the battle it’s waging with ISPs begins to more closely resemble the disputes that television networks get into with cable providers. Netflix may want to march under the noble banner of net neutrality, but Netflix versus Verizon is really the updated version of CBS versus Time Warner Cable.

—Amir Efrati contributed to this article.

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